Why Google Isn't Growing (GOOG)

Jim Edwards, provided by

Published 8:03 am, Saturday, April 19, 2014

Google CEO Larry Page can be forgiven for being in a bad mood this weekend. On his company's Q1 2014 earnings call, his people delivered what he thought would be good news: revenues of $15.4 billion, up 19%.

Very, very few business can deliver 20% growth on billions in revenues. By any measure, Google is on fire as a company.

Yet investors hated it.

They sold the stock, and it declined 5% immediately after the call. In 24 hours the price had lost $9, from $544 per share to $536.

Google is growing, for sure. But, counterintuitively, it is not growing at the same time, as the following charts show.

From a macro perspective, Google is boxed in by two factors: The available population on the Internet and the population on the mobile portion of the Internet.

Internet growth is slowing — and Google is the Internet

Google handles about 80% of all search queries, and hundreds of millions of people use Gmail and YouTube, its most famous brands. Google is so dominant that its economics are, in many ways, a proxy for the Web as a whole. How grows the Internet, grows Google.

But growth of the Internet won't go on forever.

Already there are signs of an upcoming "inflection" in 2016, when the level of Internet penetration across the planet gets well past 50% of all humans — and the Internet itself enters a period of rapidly declining growth.

Shown another way, Google's monetization per user shows that all its growth is in the developed countries, where it is already fully penetrated.

If it is to grow meaningfully in the future (all things being equal) it must do the same in the poorer nations.

But that shows no sign of happening:

Asymco's blog states this succinctly (emphasis ours):

The disparity is enormous. US/UK revenue is on average $86/user/yr (2012) and rising. The rest of the world only manages $12/user/yr. That Rest Of World includes many wealthy countries such as all of Europe and Japan. So the problem for Google is that it has an order of magnitude less income per user in the part of the Internet which remains unpenetrated and the trends show that they are not narrowing the gap.

One might also add that the developed world has been waiting for more than 200 years for the undeveloped world to "catch up" and become rich — but it never happens. So don't hold your breath for growth on those yellow bars.

The overall effect of this is that Google's net income per user is relatively stagnant:

OK, you might say. So Internet population growth is slowing. Google is still killing it: You cannot ignore 20% growth per quarter.

That's true. But there is another way of looking at it — and Wall Street's reaction to the Q1 numbers may be an indication of that: For investors, "growth" isn't defined merely as an increase. It's defined as the growth over and abovethe background growth you'd get from the general market as a whole. Usually, those background rates are the risk-free interest rates at the bank or an index fund of the S&P 500 stocks.

But at tech companies, growth is often even more dramatic than that. And the Asymco data suggests that the background growth in Google's business is the Web population as a whole. So Google's challenge is that it must eke out greater growth than the Web itself, because if it does not then it will actually be moving backward — certainly in terms of market share.

Part of that is to do with the growth of mobile devices. More and more businesses — Amazon, LinkedIn, Apple, Facebook — have apps with their own internal search functions. And apps generally are invisible to Google's traditional Web search. But a majority of people's time in mobile is spent inside apps.

That is a long-term structural growth problem for Google. The Web is growing, but not in a way that Google can meaningfully get search ad revenue from it. More than 90% of Google's revenue comes from search ads and related services.